Can You Get a Car Loan After Bankruptcy?

Harsh as its consequences are, bankruptcy also provides a financial fresh start. One way to get going (we are not making this up): Buy a car.

Bankruptcy filings can be a stressful, even life-altering, experience. But as hard as it is, bankruptcy needn’t slam the brakes on you plans to buy a car.

Yes, bankruptcy leaves your credit report dented like the survivor of a demolition derby. The key word: survivor. Scoring a car loan after bankruptcy is possible. You simply must work smarter before you can slide behind the wheel.

Before visiting a dealership or a car-buying website, perform some do-it-yourself ego repair work. With your obligations liquidated, discharged, or satisfied, as a post-bankrupt consumer you have a shot at financial renewal. So, your credit score is in the basement. Think of it as the foundation from which your future score will soar.

Time for a pep talk. You’ve been through the worst. Better times are ahead. Review the positives in your life: Your job, your courage, your determination, your resourcefulness. You have earned a fresh start, and you’re going to make the most of it.

If you need a car loan after bankruptcy, an upbeat attitude is key to scoring the best possible terms. You must have the confidence to be firm in your dealings, and walk away if the dealer or lender won’t budge.

Some lenders — we’re not naming any names — feast on bankrupt borrowers with woe-is-me attitudes, shackling them with scandalous terms that cause more financial woes. If you let them get away with it, some lenders will charge breathtakingly high interest rates even if you make a hefty down payment.

We’re not suggesting getting decent terms on a car loan during or after bankruptcy is all green lights and express lanes. But don’t let anyone tell you you’re trapped in the exit-only lane to Bad Deal City.

First up, review your circumstances based on which variety of bankruptcy you endured.

Impact of Bankruptcy on Buying a Car

Two types of bankruptcy are available for individuals to file. Your ability to get a livable car loan can be influenced by which version you chose.

Chapter 7

Chapter 7, or straight bankruptcy, is by far the more popular choice. It’s relatively fast; it’s straightforward; and it’s clean.

Chapter 7 liquidates some of your possessions, assets, and property to repay outstanding debts; other debts may be discharged outright. From initial filing to the discharge of debt, the process takes roughly 80 to 130 days to complete.

A Chapter 7 bankruptcy stays on your credit reports for up to 10 years from the filing.

Buying a car before completing the Chapter 7 process is problematic. Even if you’re able to acquire new-to-you wheels, your bankruptcy trustee may force a sale to meet some of your outstanding debts.

Buying one when your bankruptcy has closed will be challenging, at minimum. Proceed with absolute caution.

Chapter 13

In Chapter 13 bankruptcy, applicants with reliable incomes reorganize their debts in a three- to five-year repayment plan. A key consideration in Chapter 13: Debtors may be able to keep assets they would otherwise lose to repossession or foreclosure … vehicles included.

Upon filing, a meeting of creditors occurs, usually between 20 to 50 days. Within 30 days of filing, you’ll start making agreed-upon payments to your bankruptcy trustee, without respect to whether your plans haven’t been approved. Once the plan is firm, you continue through its completion. Whatever isn’t paid back at the finish can be discharged.

As long as you’re in the repayment-plan period, you need permission from the court to buy a car. Otherwise, like Chapter 7, you may want to postpone car and car-loan shopping until your debt is discharged.

How Soon after Bankruptcy Can I Get a Car Loan?

There isn’t a fixed period after you settle a bankruptcy before you can buy a car. In fact, if you can find reasonable financing, buying a car and making payments — on time — can help restore your credit rating. Proceed with caution. (We repeat ourselves, but informed wariness is crucial.)

Arranging financing in advance, maybe enlisting a cosigner, not paying too much for a car, and avoiding predatory lenders  (more about which below) are important steps to avoid repeating financial problems.

What You Need to Know

If you can wait, you should. For openers, lenders are going to want to see a copy of your bankruptcy discharge orders, which could take roughly 60 days after your final court proceedings.

Waiting also will give you a chance to rebuild your credit rating. At minimum, because lenders review FICO scores to set interest rates, know what’s in your report before you shop for a car or a loan.

Avoid Predatory Dealers

Steer clear of dealers who offer subprime (that is, less-than-ideal) loans and buy-here, pay-here financing options. These dealers frequently charge staggeringly high interest rates, demanding payments that can wreck your hard-won financial rebirth. Worse, such dealers prey on desperate and naive buyers, guiding them toward the worst car on their lot.

Peddlers in this category are predatory lenders dolled up as car dealers. You don’t need them. You must give them a wide berth.

Get Preapproved before Car Shopping

The most advantageous move is to go to your bank or credit union and seek preapproval for an auto loan. They may surprise you and present conditions and interest rates that make the car-buying experience much easier.

On the other hand, they may show you loan terms that you know you can’t possibly afford. That would be a clear indication you need to find some other form of transportation while you rebuild your credit.

Check out Bank and Credit Union Financing

The old maxim applies: You don’t get if you don’t ask. Don’t presume a traditional lender will turn you down. If you have a relationship with a bank and/or membership in a credit union, go there first. They have an interest in helping your long-term financial fitness, and may surprise with favorable terms.

If you can enlist a cosigner — someone whose credit score is at least somewhat better than yours — you will have improved your chances at a traditional loan.

There are no guarantees, of course. But if you’re turned down, you’re no worse off than you were.

Either way, it’s important to thoroughly review your financing options before heading to a dealership.

Lenders will want to know how you handle money. If you always made timely loan payments until a major medical bill destroyed your budget and crushed your savings, make sure the lender knows that. If your bankruptcy followed a job loss and unemployment, explain that, too.

Again, being able to shop with a preapproved loan puts you in a commanding position. Before meeting with a loan officer, assemble your pay stubs and credit report, as well as disability- and life-insurance documents. Be able to provide proof of assets, such as a house.

Did we mention securing a cosigner? Being backstopped by someone with good credit can be a substantial boost.

Make sure you ask lots of questions. Chief among these: Does the offered loan have prepayment or early payment penalties? Such riders could make refinancing prohibitively costly. Remember, you’re on a journey to improve your credit rating; you don’t want to be locked in when your score rises enough to allow refinancing at better terms.

If you absolutely must shop a buy-here, pay-here dealer — *shudder* — check with the Better Business Bureau and do an online search for consumer complaints to learn if the business has caused problems for others.

Do a public records search through the local clerk of court to see what sort of legal skirmishes, if any, the dealer has been in. Many clerks keep court records online, where they can be searched free.

Watch for red flags, for instance:

• Guaranteed loans regardless of credit.
• Needless add-ons.
• Requests for a wire transfer.
• Requests for any upfront fee besides a down payment.

Last, consider all the information you gathered before closing the deal. If a credit union has better terms, don’t settle for what a dealer offers. If you can borrow money from a family member to increase your down payment, consider doing that.

Buying a car can provide needed transportation and paying for it will help re-establish your credit.

Shop for a Loan Online

Do some research on car-lending networks. There are plenty, even for buyers with rocky credit scores, and filling out the initial application takes almost no time.

Be honest with your search term: car loans bad credit. Here, too, you’re required to do some homework. See what reviewers have to say. How long have they been in business? What’s their advertised range of interest rates?

Peer-to-peer lending — Peerform, LendingClub, Upstart, Prosper, among others — is another possibility, as are lending networks.

Again, be alert. Online lenders are certain to take a hard look at your credit history, and the interest you pay could be staggering.

If all else fails and you remain committed to getting a car, consider a subprime lender. Don’t sign anything until you have read the entire contract and understand every clause. Bring a trusted friend who’s a careful reader. The terms can be seriously unfavorable, and you could set yourself up for repossession.

At the risk of becoming monotonous, if you do consider a subprime loan, do not sign up with a buy-here, pay-here car dealer. Horror stories abound and are on the rise, as NPR’s Morning Edition reported in December 2019.

We reiterate our public-records search recommendation. Has the subprime lender been in court a lot, pursuing foreclosures and/or suing its borrowers?

Buy a Used Car

Next, get real about what you need. Buying a Jaguar or a Porsche, especially a new one, isn’t wise. In fact, any new car is probably not for you when you’re trying to rebuild your credit. You will almost certainly pay more interest on a loan than someone with a solid credit score.

Worse, new cars lose 20% of their value as soon as you leave the dealership — you’re upside down on your loan and you haven’t even made it home — and their value continues to fall quickly during the first two years of ownership.

Other considerations being at least similar — make, model, equipment — the new car is sure to be pricier, leaving you with a bigger, maybe even longer, loan that demands higher payments. More debt and higher payments could subvert your effort to rebuild your credit, since the combination means more opportunity to get caught short, and less opportunity to save.

Instead, shop for a basic used car in good shape — a simple “transportation car.” Do your research online. Find out what others are paying for similar cars. Figure out how much your monthly auto payment will be. Make certain it’s no more than 15% of your total take-home pay.

Consider, too, gas, highway tolls, parking costs, insurance, registration fees, and expected maintenance. Factor those into your budget.

If you haven’t been preapproved for a loan, it might be wise to limit the number of car dealerships you visit. Also, limit your shopping to a single day if possible. Why? Whenever a business pings your credit score, your score gets dinged. The fewer inquiries, and the fewer days on which inquiries are made, can limit the damage.

Make a Down Payment on the Vehicle

Though bankruptcy might have depleted your assets, if you have access to money for a down payment, consider using it. (If you were able to keep your prebankruptcy car, you have a trade-in head start. But consider adding cash on top of it.)

There are two advantages: The larger the down payment, the less you must borrow at high rates. Lenders look favorably at the equity you have in the car you’re buying – the more money you invest, the better you are as a credit risk. The more cash you can pay, the better.

Faced with a double-digit loan interest rate, an all-cash deal, obviously, is best.

Our auto loan calculator can help you determine how much money to put down on a vehicle so you end up with an affordable  monthly payment.

Build Your Credit

The poorer your financial record, the lower your credit score and higher your interest rates will be. The only way to combat the bad information in your credit report is to slowly replace it with good information.

You can start reporting positive information to the credit bureaus by getting a secured or unsecured credit card. With a low credit score, you’ll almost certainly have a high interest rates, especially on an unsecured card, which doesn’t require collateral. Use the card to build your credit after bankruptcy, but don’t carry a balance on the debt from month to month.

A secured card might come with more reasonable terms, but requires a deposit equal to the borrowing limit on the card. You will probably want to use your card for at least six months, making timely payments. Doing this could substantially reduce the interest rate when you apply for a car loan.

To get the project started, order a copy of your credit report. Each of the Big Three tracking agencies — Experian, TransUnion, Equifax — are obliged to provide a free report once every 12 months.

A solid plan is to order one from each at four-month intervals. For instance, Experian in February, TransUnion in June, Equifax in October. Rinse and repeat. That way you’re routinely getting free, fresh information.

Read each report carefully, and be prepared to dispute credit-reporting errors. Each of the Big Three provides error-reporting instructions on its website.

As you move into your post-bankruptcy/fresh start life — and you contemplate making significant purchases while taking on debt — tapping the advice of a certified credit counselor from InCharge Debt Solutions may be just the guidance you need. InCharge’s credit counseling is a free service that helps evaluate your finances, create a budget, help you spot trouble before it arises, and set you on a path to reach your financial goals — like being able to afford, a little way down the road, something shiny, sleek, and maybe even new.